Calpine Generating: A clean collar

Calpine's CFO, Bob Kelly, has a reputation for speaking his mind, and for taking a dislike to bankers that say no. This approach has polarised the US bank market, but Calpine usually gets what it wants. Nevertheless, Calpine has frequently worked hard, both to find new money, and to refinance old money.

Calpine Generating Company, or CalGen for short, is the refinancing of the Calpine Construction Finance Company II. CCFC II closed in November 2000, and was a larger version of the first Calpine Construction Finance construction revolving credit facility. The idea behind both was that they would provide a ready source of non-recourse financing for projects that Calpine needed to roll out quickly.

While it featured lender control over the choice of projects, as well as a large collateral package, it gave Calpine $2.5 billion in non-recourse money to deploy largely as it saw fit.

The original financing, led by CSFB and Scotia, matured in 2004, and the intervening period, and its wave of energy bankruptcies, had made lenders very wary of merchant exposure. Nevertheless, the first CCFC portfolio was refinanced in August 2003 through a $750 million B loan from Goldman Sachs.

The CCFC II refinancing was set to draw heavily from the CCFC I deal, which had used a price collar from the lead arranger to protect lenders from price volatility. But Calpine decided to enlist Deutsche to arrange a deal that would not feature price support. It went so far as to announce an intention to sell $2.3 billion in debt, of which $1.3 billion was first priority, and $1 billion was second priority.
But three weeks later it pulled the effort, citing adverse market conditions, and turned to Morgan Stanley and its commodities trading division, to rescue the deal.

CalGen's portfolo is largely merchant, insofar as it sells 20% of its output under contract, 40% to Calpine Energy Services, and the rest on the spot market. The Calpine Energy Services contract, however, ranks as an unsecured obligation of Calpine, and thus is not a major factor in lender comfort. This offtaker profile was a main reason for the cancellation, although at that point in the year there was a small spike in the pricing available on B loans, according to Calpine.

In the circumstances, the collar on price volatility that Morgan Stanley could provide was a key selling point. This is believed to be similar in essentials to the earlier CCFC I hedge, and protects lenders from a sustained fall in power prices. Morgan Stanley was also able to extract a slightly more demanding covenant package from Calpine, including that Calpine offer the proceeds of any asset sale to lenders for prepayment.

The debt is structured as several classes of notes and loans, with varying levels of maturity and security:

• $600 million of first priority term loans due 2009 priced at 375bp over Libor, with a Libor floor of 125bp
• $235 million of first priority notes due 2009 priced at 375bp over Libor, with a Libor floor of 125bp
• $100 million of second priority term loans due 2010 offered at 98.5% of par and priced at 575bp over Libor, with a Libor floor of 125bp;
• $640 million of second priority notes due 2010 offered at 98.5% of par and priced at 575bp over Libor, with a Libor floor of 125bp;
• $680 million of third priority seven-year notes priced at 900bp over Libor, with a Libor floor of 125bp; and
• $150 million of 11.5% third priority secured fixed rate notes due 2011.

The deal also featured a $200 million revolver led by Scotia Capital, and including TD Securities, Credit Lyonnais, Bayerische Landesbank, Union Bank of California, and ING. This supports CalGen's trading activities.

But the term loans and notes still proved a difficult sell, particularly those with a second priority position, which had per kW debt levels that made some lenders wary. But the price collar, as well as continued buoyancy in the high yield market, means that the underwriter ultimately moved most of the debt into other accounts.
CalGen is an essential part of Calpine, and accounts for almost a third of its generating capacity. While this underscores the fact that it is difficult to see the unit as a non-recourse credit, it also shows how vital the deal was to Calpine's future.

Calpine Generating Company
Status: Closed 23 March 2004
Size: $2.4 billion
Description: High-yield and term B refinancing of construction revolver for 9,080MW of capacity.
Sponsor: Calpine
Bookrunner: Morgan Stanley
Lawyers to the borrower: Stoel Rives, Covington & Burling
Lawyers to the lenders: Latham & Watkins
Engineer: RW Beck
Banks' consultant: Pace Global